The situation in the Middle East has intensified once more. Iran's missile launch towards Israel has jeopardized the fragile ceasefire agreement that had recently shown promise. This development has triggered a sharp surge in international oil prices, while gold continues to face pressure from a strengthening US dollar and heightened expectations for interest rate hikes.
Crude Oil: Geopolitical Risks Reignite, Brent Surges Towards $96
During early Asian trading on Monday, crude oil futures prices jumped. Brent crude oil surged by as much as 3.6%, hitting $96.47 per barrel, while West Texas Intermediate (WTI) crude approached the $94 mark before paring some gains. Market sentiment is tense, stemming from Iran's launch of several missile barrages towards Israel on Sunday. Iran stated the action was a warning to Israel, demanding it "cease hostilities in Lebanon." According to Israeli military sources, all incoming missiles were intercepted, with no casualties reported. However, this attack represents the latest escalation in ongoing clashes between Israel and the Iran-backed Hezbollah in Lebanon, completely destabilizing the previously agreed-upon fragile ceasefire framework.
Following the attack, the US President urged Iran to return to negotiations and criticized Israel for its airstrike on Beirut on Sunday. Reports indicate that in a call with the Israeli Prime Minister, the US President stated he would pressure Israel not to retaliate. He later made a firm statement in an interview, asserting his authority in the matter. Over the past week, hostilities in the Middle East have intensified dramatically, leading to the renewed closure of the critical Strait of Hormuz, severely disrupting the normal supply of global crude oil, fuel, and natural gas.
The US Central Command confirmed on Sunday that it had shot down two Iranian attack drones near the Strait of Hormuz that posed a threat to international shipping. Just last Friday, six ballistic missiles were also fired towards Bahrain and Kuwait. In response, US forces destroyed an Iranian coastal radar station. "The escalation between Israel and Iran over the weekend shows us once again how fragile the ceasefire is," said the president of Lipow Oil Associates. "Geopolitical risks have risen significantly. Not only could the Strait be closed longer than expected, but the probability of Iran further restricting shipping in the Red Sea is also increasing."
The chief investment officer at Karobaar Capital LP in Chicago noted that markets had previously been priced too optimistically. "The market has been swinging between pricing in a 'deal will be done' scenario and the reality that 'fundamental positions on both sides have not changed.' Whenever optimism slightly detaches from facts, oil prices rebound violently." In reality, the path to peace faces multiple obstacles. Iran demands that Israel and Lebanon must first agree to a ceasefire before a final deal can be reached. Although there were reports last week of Israel and Lebanon agreeing to a truce, it was conditional on Hezbollah ceasing hostilities. This Iran-backed militant group has explicitly rejected a ceasefire, and clashes continued over the weekend.
Even if a peace agreement between the US and Iran were miraculously achieved, the normalization of crude oil supply would not be instantaneous. Mines in the Strait of Hormuz would need clearing, numerous shuttered oil fields could take months to resume production, and damage to energy infrastructure from previous drone and missile attacks requires urgent repair. On the other side of the supply equation, OPEC+ has agreed to increase its daily production quota by another 188,000 barrels in July. However, with the Persian Gulf export routes effectively blocked, most member states are unable to implement this production increase plan.
Gold: Strong Dollar and Rate Hike Expectations Weigh, Prices Consolidate at Lower Levels
In contrast to the sharp rally in oil, the haven asset gold failed to receive a significant boost. While Iran's attack increased geopolitical uncertainty, market concerns about reignited global inflation and hawkish central bank stances have firmly suppressed precious metal performance. After plummeting nearly 5% last week, completely erasing its year-to-date gains, spot gold traded around $4,345 per ounce on Monday, edging up 0.3% intraday. Silver also saw a slight rebound of 0.3% to $68.07, but it had crashed nearly 10% last week. Platinum and palladium also recorded small gains.
The direct pressure on gold comes from the macroeconomic front. The US non-farm payrolls data for May released on Friday comprehensively exceeded market expectations, with job additions far surpassing estimates. This strong data quickly ignited market bets that the Federal Reserve could raise interest rates as soon as 2026, pushing US Treasury yields and the dollar significantly higher. The Bloomberg Dollar Spot Index rose another 0.1% on Monday, following a 1.1% climb the previous week, dealing a heavy blow to dollar-denominated gold.
With the Middle East conflict entering its fourth month, disruptions to energy transportation continue to push oil prices higher, exacerbating global inflation concerns. This makes major central banks more inclined to maintain high interest rates for longer or even restart rate hikes, creating a headwind for non-yielding assets like gold. Nevertheless, long-term buying interest in the market remains active. Data shows that the Chinese central bank purchased approximately 10 tonnes of gold last month, marking the highest monthly increase in 2024 and extending its streak of consecutive monthly purchases to 19 months. This highlights the sustained strategic demand for gold from China, one of the world's largest buyers.
The head of market analysis at StoneX Group wrote in a report that the key issues in the Middle East conflict remain "unresolved," noting that their view for a downward bias in gold prices is currently being validated, but they will closely monitor any signs of bargain-hunting buying. Currently, both major commodity markets are closely watching the same core variable: where the Middle East crisis is headed. Whether the US President can compel Israel to curb military actions, whether Iran will further block key shipping lanes, and the upcoming expectations for the Federal Reserve's interest rate decision will all determine the next volatile swings in oil and gold prices.
Comments